Recap Accounting Process Prepared by Mubasharmajeed
Introduction to Financial Statements • Companies prepare interim financial statements • and annual financial statements.
Three primary financial statements. Balance Sheet Income Statement Statement of Cash Flows We will use a corporation to describe these statements. Introduction to Financial Statements
Describes where the enterprise stands at a specific date. Balance Sheet Income Statement Statement of Cash Flows Introduction to Financial Statements Depicts the revenue and expenses for a designated period of time.
The Concept of the Business Entity A business entity is separate from the personal affairs of its owner. Vagabond Travel Agency
Assets and Liabilities • Assets are economic resources that are owned by the business and are expected to provide positive future cash flows. • Liabilities are debts that represent negative future cash flows for the enterprise. • Owners’ equity represents the owner’s claim to the assets of the business.
The Accounting Equation Assets = Liabilities + Owners’ Equity $300,000 = $80,000 + $220,000
ASSETS LIABILITIES EQUITIES Debit for Increase Credit for Decrease Debit for Decrease Credit for Increase Debit for Decrease Credit for Increase Debit and Credit Rules Debits and credits affect accounts as follows: A=L+OE
Double Entry AccountingThe Equality of Debits and Credits A=L+OE = Debit balances Credit balances In the double-entry accounting system, every transaction is recorded by equal dollar amounts of debits and credits.
May 1: Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock. Will Capital Stock increase or decrease? Will Cash increase or decrease?
Capital Stock increases $8,000 with a credit. Cash increases $8,000 with a debit. • May 1: Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock.
May 2: JJ’s purchased a riding lawn mower for $2,500 cash. Will Tools & Equipment increase or decrease? Will Cash increase or decrease?
Tools & Equipment increases $2,500 with a debit. Cash decreases $2,500 with a credit. • May 2: JJ’s purchased a riding lawn mower for $2,500 cash.
May 8: JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in cash and issued a note payable for the remaining $13,000. Will Cash and Notes Payable increase or decrease? Will Truck increase or decrease?
Cash decreases $2,000 with a credit. Notes Payable increases $13,000 with a credit. Truck increases $15,000 with a debit. • May 8: JJ’s purchased a $15,000 truck. JJ’s paid $2,000 down in cash and issued a note payable for the remaining $13,000.
The Journal In an actual accounting system, transactions are initially recorded in the journal.
Posting Journal Entries to the Ledger Accounts Postinginvolves copying information from the journal to the ledger accounts.
The Ledger Accounts are individual records showing increases and decreases. Cash Accounts Payable The entire group of accounts is kept together in an accounting record called a ledger. Capital Stock
Increases are recorded on one side of the T-account, and decreases are recorded on the other side. The Use of Accounts Title of Account Left or Debit Side Right or Credit Side
Debit and Credit Entries Receipts are on the debit side. Payments are on the credit side. The balance is the difference between the debit and credit entries in the account.
Ledger Accounts After Posting This ledger format is referred to as a running balance (as opposed to simple T accounts).
What is Net Income? Net income is not an asset it’s an increase in owners’ equity from profits of the business. A=L+OE Increase Decrease Increase Either (or both) of these effects occur as net income is earned . . . . . . but this is what “net income” really means.
Retained Earnings A=L+OE Capital Stock Retained Earnings The balance in the Retained Earnings account represents the total net income of the corporation over the entire lifetime of the business, less all amounts which have been distributed to the stockholders as dividends.
Revenue and Expenses The price for goods sold and services rendered during a given accounting period. Increases owner’s equity. The costs of goods and services used up in the process of earning revenue. Decreases owner’s equity.
The Realization Principle: When To Record Revenue Realization Principle Revenue should be recognized at the time goods are sold and services are rendered.
The Matching Principle: When To Record Expenses Matching Principle Expenses should be recorded in the period in which they are used up.
EQUITIES Debit for Decrease Credit for Increase EXPENSES REVENUES Debit for Increase Credit for Decrease Debit for Decrease Credit for Increase Debits and Credits for Revenue and Expense Expenses decrease owner’s equity. Revenues increase owner’s equity.
Let’s analyze the revenue, and expense transactions for JJ’s Lawn Care Service for the month of May. We will also analyze a dividend transaction.
May 29: JJ’s provided lawn care services for a client and received $750 in cash. Will Sales Revenue increase or decrease? Will Cash increase or decrease?
Sales Revenue increases $750 with a credit. Cash increases $750 with a debit. • May 29: JJ’s provided lawn care services for a client and received $750 in cash.
May 31: JJ’s purchased gasoline for the lawn mower and the truck for $50 cash. Will Gasoline Expense increase or decrease? Will Cash increase or decrease?
Gasoline Expense increases $50 with a debit. Cash decreases $50 with a credit. • May 31: JJ’s purchased gasoline for the lawn mower and the truck for $50 cash.
May 31: JJ’s Lawn Care paid Jill Jones and her family a $200 dividend. Will Dividends increase or decrease? Will Cash increase or decrease?
Dividends increase $200 with a debit. Cash decreases $200 with a credit. • May 31: JJ’s Lawn Care paid Jill Jones and her family a $200 dividend.
Now, let’s look at the Trial Balance for JJ’s Lawn Care Service for the month of May.
All balances are taken from the ledger accounts on May 31 after considering all of JJ’s transactions for the month. Proves equality of debits and credits.
The Accounting Cycle Make end-of-year adjustments. Journalize transactions. Post entries to the ledger accounts. Prepare trial balance. Journalize and post closing entries. Prepare financial statements. Prepare adjusted trial balance. Prepare after closing trial balance.
Adjusting Entries • THE ACCOUNTING CYCLE: • Accruals and Deferrals
At the end of the period, we need to make adjusting entries to get the accounts up to date for the financial statements.
Adjusting Entries Adjusting entries are Every adjusting needed whenever revenue or expenses affect more than one entry involves a change in either a revenue or expense and an asset or liability. accounting period.
Types of adjustment • Two types of adjustment • 1- Deferrals • Result from prepayments made or received • E.g. Payment of six month rent paid or received • 2- Accrual • These are items are unrecorded , unpaid or not yet received • E.g. Salaries payable, Services revenue receivable
Rules for Adjusting Entries • Affect 1 Income statement account • Affect 1 balance sheet account • Cash account is never be involved
Converting Assets to Expenses $2,400 Insurance Policy Coverage for 12 Months $200 Monthly Insurance Expense Jan. 1 Dec. 31 On January 1, Webb Co. purchased a one-year insurance policy for $2,400.
Converting Assets to Expenses Initially, costs that benefit more than one accounting period are recorded as assets.
Converting Assets to Expenses The costs are expensed as they are used to generate revenue.
Converting Assets to Expenses Balance Sheet Cost of assets that benefit future periods. Income Statement Cost of assets used this period to generate revenue.
The Concept of Depreciation Depreciable assets are physical objects that retain their size and shape but lose their economic usefulness over time. Depreciation is the systematic allocation of the cost of a depreciable asset to expense.